WEBVTT - The Hidden History of Eurodollars, Part 2: Defending the Dollar System 0:00:02.720 --> 0:00:13.360 Bloomberg Audio Studios, podcasts, radio news Tracy, Are we still 0:00:13.400 --> 0:00:16.000 doing this? It seems like it Actually what is this 0:00:16.120 --> 0:00:19.119 supposed to be? Is this a Cold war bunker or 0:00:19.160 --> 0:00:19.800 something like that. 0:00:20.640 --> 0:00:23.520 That's a good question. Maybe it's a vault or the 0:00:23.760 --> 0:00:26.720 vienna sewage system like in the Third Band. Do you 0:00:26.800 --> 0:00:28.040 remember that that was a good movie? 0:00:28.080 --> 0:00:31.440 I should see that, Okay, But in this episode we've 0:00:31.480 --> 0:00:34.519 moved on from the immediate post war period. We are 0:00:34.520 --> 0:00:37.560 now in the nineteen sixties, a turbulent time for society 0:00:37.600 --> 0:00:40.880 and politics, but also for euro dollars, which are the 0:00:40.920 --> 0:00:42.280 subject of our special series. 0:00:42.520 --> 0:00:42.720 Yep. 0:00:42.880 --> 0:00:46.479 This is the second installment of our three part history 0:00:46.560 --> 0:00:50.120 of euro dollars. If you haven't listened to our first episode, 0:00:50.159 --> 0:00:52.960 you should definitely go back and find it. We have 0:00:53.040 --> 0:00:56.720 been tracing the origins of this very particular and special 0:00:56.760 --> 0:00:59.800 form of money to better understand how it came to 0:00:59.800 --> 0:01:03.320 be and what it actually does. And our first episode 0:01:03.320 --> 0:01:06.920 looked at the creation of euro dollars and they're perhaps 0:01:07.040 --> 0:01:09.160 unexpected communist connections. 0:01:09.319 --> 0:01:10.920 Yep, that's right. And now we're going to turn the 0:01:10.959 --> 0:01:14.600 page new decade, a new chapter in euro dollar's existence. 0:01:14.800 --> 0:01:18.400 There's something else new that happens right around this time. 0:01:18.640 --> 0:01:22.720 So dollar swap lines get created. Do you remember those, Joe. 0:01:23.000 --> 0:01:26.119 I've read about them in that Adam Two's book crashed, 0:01:26.319 --> 0:01:28.759 But yes, they were big in two thousand and eight, 0:01:28.840 --> 0:01:32.080 then again in twenty twenty, also the Eurozone crisis. They're 0:01:32.120 --> 0:01:34.720 basically something that no one ever talks or thinks about 0:01:34.760 --> 0:01:35.760 outside of a crisis. 0:01:35.840 --> 0:01:39.000 Yeah, I think that's right. So they are dollar borrowing 0:01:39.040 --> 0:01:42.720 lines for other central banks. And I've seen swap lines 0:01:42.800 --> 0:01:47.400 described as the international lender of last resort. They tend to, 0:01:47.760 --> 0:01:51.640 as you mentioned, get tapped during big emergencies. That's when 0:01:51.680 --> 0:01:56.240 we hear about them. But swap lines basically allow central 0:01:56.240 --> 0:01:59.480 banks to exchange currencies, and in this case it is 0:01:59.560 --> 0:02:00.760 all about getting dollars. 0:02:01.160 --> 0:02:04.080 And as a reminder, our storytellers for these episodes are 0:02:04.160 --> 0:02:05.840 lovemanand and Josh Younger. 0:02:06.160 --> 0:02:09.320 I'm levmanand I'm a law professor at Columbia Law School, 0:02:09.320 --> 0:02:11.760 where I study money and banking and the history of 0:02:11.800 --> 0:02:12.440 central banking. 0:02:13.080 --> 0:02:15.080 I'm Josh Younger. I'm a policy advisor at the Federal 0:02:15.080 --> 0:02:17.800 Reserve Bank of New York and the views I am 0:02:17.840 --> 0:02:20.200 going to express are my own and not necessarily those 0:02:20.200 --> 0:02:21.680 of the Federal Reserve Bank of New York or the 0:02:21.680 --> 0:02:22.680 Federal Reserve system. 0:02:23.000 --> 0:02:25.200 When we left off, we were at the end of 0:02:25.240 --> 0:02:28.520 the nineteen fifties, the euro dollar market was just a 0:02:28.600 --> 0:02:32.760 billion dollars or so. But it's grown from pretty much nothing, 0:02:32.960 --> 0:02:37.040 and so it's starting to attract more attention from policymakers 0:02:37.040 --> 0:02:41.080 at central banks. And now as we enter the nineteen sixties, 0:02:41.360 --> 0:02:44.760 euro dollars are even going to hit mainstream politics. 0:02:45.080 --> 0:02:45.880 Let's take a listen. 0:03:20.320 --> 0:03:22.520 So now it's the fall of nineteen sixty, Kenny's run 0:03:22.639 --> 0:03:26.079 for president, a very tight race against Vice President Richard Nixon, 0:03:26.480 --> 0:03:29.280 and in the background, the monetary system is in crisis 0:03:29.480 --> 0:03:32.680 and it's really showing signs not just to fatigue, but 0:03:32.760 --> 0:03:36.600 of potential collapse. And so to understand why that could happen, like, 0:03:36.600 --> 0:03:39.400 what does that even mean, especially in the context of 0:03:39.440 --> 0:03:41.360 the nineteen sixties, we kind of have to go back 0:03:41.400 --> 0:03:44.320 to the war. So it's nineteen forty four now, and 0:03:44.520 --> 0:03:47.480 forty four countries are convening in Bretton Woods, New Hampshire. 0:03:48.160 --> 0:03:50.680 Small town, big hotel. They took up most of it. 0:03:50.680 --> 0:03:53.960 It's about seven hundred people. And the whole premise of 0:03:54.000 --> 0:03:58.480 this is to find a way to restructure the global 0:03:58.520 --> 0:04:01.400 economic and monetary system after the war's officer. It's still 0:04:01.400 --> 0:04:03.600 a presumptuous right, the wars not ever yet, but they're 0:04:03.600 --> 0:04:06.360 still planning ahead. And so you know, we hear a 0:04:06.360 --> 0:04:10.120 lot about Yelton, Potsdam and the big conferences about the 0:04:10.160 --> 0:04:12.680 partition of Europe and Berlin and so forth, But this 0:04:12.760 --> 0:04:16.880 is really among the most important of these postwar planning conferences. 0:04:16.920 --> 0:04:19.880 It's the brainchild of Harry Dexter White, who most people 0:04:19.920 --> 0:04:22.520 haven't heard of as well. He's been the Treasury since 0:04:22.520 --> 0:04:26.160 the mid thirties. He's a PhD economist, doesn't really like 0:04:26.200 --> 0:04:29.719 what ends up for teaching, and Milton Friedman's professor recruits 0:04:29.800 --> 0:04:31.400 him to go to the Treasury to work from Morgan 0:04:31.400 --> 0:04:35.200 thou who's FDRs very long serving Treasury Secretary. I think 0:04:35.240 --> 0:04:38.680 he's the second longest serving after Gallaton, who is Jefferson's secretary. 0:04:38.800 --> 0:04:40.360 So he has the job for like twelve years, which 0:04:40.360 --> 0:04:44.840 is a long time to be a Treasury secretary. And 0:04:45.200 --> 0:04:47.920 there's really two competing visions going into this conference. The 0:04:47.960 --> 0:04:52.880 first is the American vision, which is a dollar based 0:04:52.920 --> 0:04:57.200 global monetary order in which gold forms the foundation. So 0:04:57.240 --> 0:05:00.720 your dollars are convertible into gold. All and currencies, at 0:05:00.760 --> 0:05:04.680 least among the victors are fixed in their exchange rates, 0:05:04.680 --> 0:05:08.200 so pegged to the dollar, and so everything kind of 0:05:08.240 --> 0:05:10.359 revolves around the US dollar and the gold stock that 0:05:10.400 --> 0:05:12.680 the US has accumulated over the course of the war. 0:05:13.200 --> 0:05:15.120 The US is two thirds of global gold reserves at 0:05:15.120 --> 0:05:17.440 this point, so it's monetary gold reserve. So they have 0:05:17.480 --> 0:05:20.360 a lot of let's say, leverage going into this conference, 0:05:20.400 --> 0:05:23.000 and they know it. And that's been a dream of 0:05:23.040 --> 0:05:25.560 White since basically joined the Treasury. He's been pushing for 0:05:25.720 --> 0:05:28.440 a global dollar system. He really wants the dollar to 0:05:28.520 --> 0:05:30.919 retake its prior position. Remember in the twenties, the dollar 0:05:31.000 --> 0:05:33.520 was the global reserve currency, was the currency of trade. 0:05:33.760 --> 0:05:36.279 It lost that status over the thirties on a series 0:05:36.279 --> 0:05:37.960 of runs on the dollars. So he's very familiar with 0:05:37.960 --> 0:05:41.159 what happens when this breaks down, and he wants to 0:05:41.160 --> 0:05:43.400 bring the dollar back. This is the second bite at 0:05:43.400 --> 0:05:47.280 the apple, and so he wants the dollar to be 0:05:47.320 --> 0:05:48.800 part of global trade. He wants to be the unit 0:05:48.839 --> 0:05:51.200 of account. He actually wants all the invaded territories to 0:05:51.279 --> 0:05:53.400 use the dollar. So he wants invasion currency to be 0:05:53.440 --> 0:05:56.240 printed by the Treasury they called yellow seal dollars, So 0:05:56.279 --> 0:05:59.000 he wants dollars everywhere in cleaning North Africa, Germany, et cetera, 0:05:59.440 --> 0:06:02.520 and actually do that in some places. And the British, 0:06:02.560 --> 0:06:04.240 on the other hand, are very aware of this, in 0:06:04.320 --> 0:06:06.920 large part because they don't have any gold and so 0:06:07.000 --> 0:06:09.960 they have no leverage. But they're worried that the US 0:06:10.000 --> 0:06:11.920 will come out of this conference with way too much 0:06:11.920 --> 0:06:15.400 global power, especially relative to the European allies, and John 0:06:15.440 --> 0:06:17.880 Mayner Kain's is their champion. He comes up with an 0:06:17.920 --> 0:06:20.520 alternative arrange because a bank ORP, which is a contraction 0:06:20.600 --> 0:06:23.920 of bunkin or in French. I promised earlier I wouldn't 0:06:23.960 --> 0:06:25.960 do French words, so I apologized with the accent, but 0:06:26.040 --> 0:06:28.200 you know it's bank gold. Which is the idea is 0:06:28.240 --> 0:06:32.200 there is no global currency issued by one country. There's 0:06:32.240 --> 0:06:37.840 only a transnational credit organization kind of like a bank, 0:06:37.960 --> 0:06:40.640 where international trade happens on the books of that organization. 0:06:40.720 --> 0:06:43.599 So it's something like a transnational central bank, and it 0:06:43.680 --> 0:06:48.080 involves everyone giving up their sovereignty to some extent to 0:06:48.320 --> 0:06:50.880 facilitate global trade in what he considered sort of a 0:06:50.880 --> 0:06:55.120 fair and less arbitrary way. Meanwhile, White is very aware 0:06:55.160 --> 0:06:58.160 of the potential sacrifice of sovereignty to use the dollars 0:06:58.200 --> 0:07:00.680 of global reserve currency in the global unit of trade. 0:07:00.720 --> 0:07:02.840 It's just he would prefer everyone else to sacrifice their 0:07:02.880 --> 0:07:05.800 sovereignty rather than the US, and so in the end, 0:07:05.880 --> 0:07:09.359 basically the US wins, and they win because Lionel Robbins 0:07:09.400 --> 0:07:11.600 is one of the UK delegation. This is in Ben 0:07:11.680 --> 0:07:14.120 Steele's book. He basically says, we needed the cash right, 0:07:14.160 --> 0:07:16.720 so they don't have a lot of leverage. This is 0:07:16.720 --> 0:07:18.120 a power grab by the US. 0:07:18.520 --> 0:07:22.000 The US is by far the biggest economy in the world, 0:07:22.480 --> 0:07:25.920 it has the prevailing military in the world, and there's 0:07:25.960 --> 0:07:30.840 an opportunity here for real internationalism and cooperation around global 0:07:30.880 --> 0:07:34.920 trade and the monetary system that facilitates it, and the 0:07:35.080 --> 0:07:41.440 US rejects that and essentially imposes an alternative system that 0:07:41.800 --> 0:07:44.480 puts the US much more in the driver's seat and 0:07:44.600 --> 0:07:47.080 everybody else in a more subordinate position. 0:07:47.720 --> 0:07:49.640 It's also there's a lot of very human elgiment this, 0:07:49.760 --> 0:07:51.400 Like by the end of the Brettonwoods conference it's three 0:07:51.400 --> 0:07:53.120 weeks long. No one thought it would go that long. 0:07:53.560 --> 0:07:56.200 They're tired they're hungover. They went through a lot of 0:07:56.240 --> 0:07:59.560 liquor at this conference. There's no food left at the hotel, 0:07:59.760 --> 0:08:01.960 and so like everyone just kind of wants to go home. Now, 0:08:01.960 --> 0:08:03.920 that's not a great reason to sign the world over 0:08:03.960 --> 0:08:07.360 to the US as a dollar centric universe, but there 0:08:07.400 --> 0:08:09.240 really is like a human elements how all of this 0:08:09.280 --> 0:08:10.840 goes down. That's kind of one of the themes through 0:08:10.840 --> 0:08:11.679 this whole story. 0:08:12.360 --> 0:08:15.600 And multilateralism is hard, and there are a lot of 0:08:15.640 --> 0:08:20.440 frictions to get countries to cooperate on really really high 0:08:20.440 --> 0:08:25.480 stakes issues for their domestic economies. And we'll see in 0:08:25.520 --> 0:08:29.520 the course of this story how cooperation often breaks down 0:08:29.680 --> 0:08:35.679 and shortcuts prevail over longer term, higher cost solutions to problems. 0:08:36.040 --> 0:08:38.360 So the Brentwood system is one in which for thirty 0:08:38.400 --> 0:08:39.840 five dollars you can have an ounce of gold from 0:08:39.880 --> 0:08:42.520 the treasury and specifically foreign central banks. You have to 0:08:42.520 --> 0:08:44.360 be an official institution that you know, I couldn't get 0:08:44.400 --> 0:08:47.200 thirty five dollars for gold, but the Bunk de France could. 0:08:47.679 --> 0:08:49.800 And so the US isn't a sense of the world's 0:08:49.800 --> 0:08:53.360 banker because they're issuing dollars and they can in principle 0:08:53.400 --> 0:08:55.480 issue more dollars than they have gold. So it's not 0:08:55.520 --> 0:08:59.240 a fully reserved system. There's leverage embedded in the international system, 0:08:59.720 --> 0:09:03.079 and so that happens pretty quickly because global trade expands 0:09:03.800 --> 0:09:07.839 and the US monetary gold stock is not increasing. Actually 0:09:07.880 --> 0:09:10.160 most of the gold production is in Russia, so they're 0:09:10.160 --> 0:09:13.360 not giving it over so easy, and so over time 0:09:13.920 --> 0:09:17.559 the world needs more and more dollars and the value 0:09:17.600 --> 0:09:20.319 of those dollars implicitly starts to decline. Now, what does 0:09:20.320 --> 0:09:22.720 that mean in the context of a peg from the treasury. 0:09:22.720 --> 0:09:24.840 If the treasure will always buy your dollars for renounce 0:09:24.840 --> 0:09:26.640 of gold for thirty five dollars, what does it mean 0:09:26.640 --> 0:09:28.120 for the value the dollar to go down? Well, that's 0:09:28.160 --> 0:09:31.000 not the only gold market in town, and soon on 0:09:31.080 --> 0:09:34.160 the continent, and in London at the Metal exchange, it 0:09:34.200 --> 0:09:36.680 costs a little more than thirty five dollars to buy 0:09:36.880 --> 0:09:39.920 an ounce of gold, and that's really consequences of non 0:09:39.960 --> 0:09:43.240 monetary demand. So you have some speculators. A huge fraction 0:09:43.280 --> 0:09:44.960 of gold in the world is held up in jewelry 0:09:45.000 --> 0:09:47.200 like that's the real thing. So you know, there's reasons 0:09:47.200 --> 0:09:49.240 you would want gold other than to back your currency. 0:09:49.320 --> 0:09:51.120 I think it's fair to say, and there are more 0:09:51.160 --> 0:09:52.880 and more of those reasons and more and more demand 0:09:52.920 --> 0:09:56.600 for those purposes over time. And so this introduces a 0:09:56.640 --> 0:10:00.199 fundamental instability into the breton Wood system, because if a 0:10:00.200 --> 0:10:02.880 foreign central bank is exporting to the US, the US 0:10:02.920 --> 0:10:04.920 is running a balance of payments deficit. That means they're 0:10:04.920 --> 0:10:08.480 importing more than they are exporting. Dollars are piling up 0:10:08.600 --> 0:10:11.640 in Europe. Those dollars can in principle be exchanged for 0:10:11.720 --> 0:10:13.840 gold at thirty five dollars an ounce. That gold can 0:10:13.880 --> 0:10:15.960 be sold for thirty five dollars and fifteen cents an 0:10:16.000 --> 0:10:18.960 ounce in London, and sometimes much more than that. And 0:10:19.040 --> 0:10:22.160 so slowly at first, then all at once, so to speak, 0:10:22.320 --> 0:10:25.440 the US gold stock starts to decline at the same 0:10:25.480 --> 0:10:28.280 time as their dollar liabilities are going up. So now 0:10:28.360 --> 0:10:30.840 you owe more gold in principle to more people, but 0:10:30.920 --> 0:10:32.960 you have less of it with which to pay them. 0:10:33.400 --> 0:10:35.720 That's a bank run, or at least a slow motion 0:10:35.800 --> 0:10:38.600 bank run, and so people get really worried that this 0:10:38.720 --> 0:10:41.040 is going to just accelerate, and they need some way 0:10:41.559 --> 0:10:44.360 essentially the staunch of the bleeding. So you know, you 0:10:44.440 --> 0:10:47.040 have a couple of options, and I should say this 0:10:47.120 --> 0:10:49.360 becomes an election issue in Kennedy Nixon. I mean it 0:10:49.360 --> 0:10:52.800 comes up in the third debate. There's a big shock 0:10:52.840 --> 0:10:55.600 to the price of gold in October of nineteen sixty, 0:10:55.640 --> 0:10:57.640 where the price goes to forty dollars ounce, which is 0:10:57.720 --> 0:10:59.040 kind of insane if you can buy it from the 0:10:59.080 --> 0:11:01.520 treasury at thirty five. It kind of sticks there for 0:11:01.520 --> 0:11:04.360 a little while, and so Nixon is out there saying, well, 0:11:04.400 --> 0:11:06.080 Kennedy's going to blow up the dollar. 0:11:06.480 --> 0:11:07.480 Mister Vice President. 0:11:07.600 --> 0:11:10.160 In the past three years, there has been an exodus 0:11:10.160 --> 0:11:12.720 of more than four billion dollars of gold from the 0:11:12.800 --> 0:11:16.760 United States, apparently for two reasons, because exports have slumped 0:11:16.760 --> 0:11:20.360 and having covered imports, and because of increased American investments abroad. 0:11:20.679 --> 0:11:22.560 If you were a president, how would you go about 0:11:22.600 --> 0:11:26.240 stopping this departure of gold from our shores? All, mister 0:11:26.280 --> 0:11:28.920 Vrongfrand the first thing we have to do is to 0:11:28.960 --> 0:11:34.840 continue to keep confidence abroad in the American dollar. That 0:11:35.000 --> 0:11:38.440 means that we must continue to have a balanced budget 0:11:38.440 --> 0:11:41.880 here at home in every possible circumstance that we can, 0:11:42.440 --> 0:11:46.280 because the moment that we have loss of confidence in 0:11:46.320 --> 0:11:49.319 our own physical policies at home, it results in gold 0:11:49.360 --> 0:11:50.000 glowing up. 0:11:50.400 --> 0:11:52.920 And he initially kind of brushes it off. He says, oh, 0:11:53.240 --> 0:11:55.800 I guess sick Nickson thinks I can trade gold in London, 0:11:55.920 --> 0:11:58.560 Like that's hilarious. And eventually this advice is like, you 0:11:58.600 --> 0:12:01.080 have to actually address this. People are really worried that 0:12:01.240 --> 0:12:03.560 your policies are going to lead to a collapse of 0:12:03.559 --> 0:12:05.440 the dollar. And so he puts out a formal statement 0:12:05.480 --> 0:12:09.280 as a candidate pledging his support for the dollar. So 0:12:10.120 --> 0:12:13.000 this is really becoming an issue of national security, Like 0:12:13.040 --> 0:12:17.360 people associate the dollar with the core of NATO in 0:12:17.400 --> 0:12:20.960 the free world, and Eisenhower is pretty explicit on this point. 0:12:21.040 --> 0:12:23.840 Kennedy's pretty explicit on this point. I mean, the collapse 0:12:23.880 --> 0:12:25.920 of the dollar is like not an acceptable outcome because 0:12:25.920 --> 0:12:29.840 it really reflects a collapse of the anti communist alliance 0:12:29.840 --> 0:12:31.800 that's developed in the past ten years. So it's kind 0:12:31.800 --> 0:12:35.040 of core to the US's sense of itself that the 0:12:35.080 --> 0:12:37.600 world remain on a dollar standard, that the dollar remains strong. 0:12:38.200 --> 0:12:41.880 Part of what's gone wrong here is Harry Dexter White, 0:12:42.679 --> 0:12:45.600 in crafting this new system that puts the dollar at 0:12:45.600 --> 0:12:49.800 the center, has given something up to everybody else, and 0:12:49.840 --> 0:12:54.040 that's the peg of the dollar to gold at thirty 0:12:54.040 --> 0:12:59.800 five dollars announced and the power that is given up 0:12:59.800 --> 0:13:02.280 by the US to all those foreign central banks to 0:13:02.400 --> 0:13:07.000 allow them to withdraw gold at that exchange rate. And 0:13:07.080 --> 0:13:10.319 at the time that this is done, the US has 0:13:10.400 --> 0:13:15.280 so much gold stock. But what has happened is we 0:13:15.440 --> 0:13:22.960 have recreated nineteenth century conditions by essentially bringing back a 0:13:23.040 --> 0:13:26.559 gold standard and the rigidity that goes with it and 0:13:26.679 --> 0:13:29.720 the run ability on the currency that goes with it. 0:13:29.880 --> 0:13:33.360 We're not used to the idea of running on the 0:13:33.400 --> 0:13:36.720 currency in the United States today, but that was a 0:13:37.000 --> 0:13:43.600 problem that countries experienced a lot when they had convertibility 0:13:43.640 --> 0:13:46.560 to gold. And so we're in the post war world 0:13:46.600 --> 0:13:51.200 here and we have brought back convertibility to gold, all 0:13:51.240 --> 0:13:53.280 the risks that go with it, and the rigidity that 0:13:53.320 --> 0:13:56.800 goes with it because we no longer have the ability 0:13:57.360 --> 0:14:00.920 to control the elasticity of the money. So apply there's 0:14:01.040 --> 0:14:06.280 this sort of bomb built into the system where if 0:14:06.320 --> 0:14:10.839 everybody decides to redeem all at once, the money supply 0:14:10.920 --> 0:14:12.920 is going to start contracting rapidly. They're going to have 0:14:12.920 --> 0:14:15.199 a crisis of confidence. And so here we are in 0:14:15.280 --> 0:14:19.320 nineteen sixty in some sense at the apex of US power, 0:14:19.920 --> 0:14:23.480 confronting the possibility that we could be in nineteen thirty 0:14:23.520 --> 0:14:29.440 two all over again with a series of withdrawals and 0:14:29.640 --> 0:14:33.480 the US dollar breaking the peg, and that comes to 0:14:33.520 --> 0:14:37.080 take on this great significance the idea that we won't 0:14:37.120 --> 0:14:39.920 be able to maintain the peg. Of course, from an 0:14:39.960 --> 0:14:43.840 optimal design perspective, you really want to be able to 0:14:43.960 --> 0:14:47.800 adjust that peg. But you've said it's going to be 0:14:47.880 --> 0:14:51.000 thirty five dollars. And now suddenly, in the Cold War world, 0:14:51.360 --> 0:14:55.680 in global politics and even in domestic politics, this idea 0:14:55.800 --> 0:15:00.000 of the dollar maintaining its value takes on this grit 0:15:00.560 --> 0:15:04.720 sense of significance, and increasingly US policy makers are in 0:15:04.800 --> 0:15:20.360 a bye. 0:15:21.240 --> 0:15:23.080 So in a speech to the IMF in September of 0:15:23.160 --> 0:15:25.440 nineteen sixty two, Kennedy is very clear on this point 0:15:25.480 --> 0:15:27.720 that the dollar, the importance of the dollar in the 0:15:27.760 --> 0:15:30.520 fight against communism, is critical to his administration. 0:15:31.440 --> 0:15:33.800 The security of the dollar, therefore, he is, and ought 0:15:33.800 --> 0:15:38.040 to be of major concern to every nation here. To 0:15:38.160 --> 0:15:41.680 undermine the strength of the dollar would undermine the strength 0:15:41.680 --> 0:15:45.440 of the free world. We are taking every prudent step 0:15:46.160 --> 0:15:49.600 to maintain the strength of the dollar to improve our 0:15:49.600 --> 0:15:53.560 balance of payments and to back up the dollar by 0:15:53.600 --> 0:15:57.320 expanding the growth of our economy. We are pledged to 0:15:57.400 --> 0:16:01.280 keep the dollar fully convertible in a goal and to 0:16:01.360 --> 0:16:06.160 back that pledge with all our resources of gold and credit. 0:16:06.480 --> 0:16:07.960 This is the thing. You can fix the problem one 0:16:07.960 --> 0:16:11.400 of two ways. You can change the peg slash change 0:16:11.400 --> 0:16:14.320 the system, or you can find ways to reinforce it 0:16:14.440 --> 0:16:17.320 through sort of makeshift measures. These are the shortcuts, right, 0:16:17.360 --> 0:16:20.440 And so you know Kennedy thinks this issue is public 0:16:20.520 --> 0:16:23.120 enemy number two. Number one is nuclear war. Number two 0:16:23.160 --> 0:16:25.080 is the stability of the dollar. He actually tells Ours 0:16:25.120 --> 0:16:27.720 Lessenger this of the course of the campaign and then 0:16:28.320 --> 0:16:30.840 into his early presidency, and so questions how do you 0:16:30.880 --> 0:16:33.280 do it? So among those two options, he commissions a 0:16:33.280 --> 0:16:36.640 test force. He's elected. He turns to Adelai Stephen Center, 0:16:36.640 --> 0:16:37.840 and he says, what do I need to focus on? 0:16:37.880 --> 0:16:41.520 And Stevenson says, definitely the dollar. In fact, this whole 0:16:41.520 --> 0:16:43.960 system isn't working, so we probably want to think about 0:16:43.960 --> 0:16:46.480 a new one. And Kennedy doesn't like that answer. Because 0:16:46.560 --> 0:16:49.320 Kennedy is sensitive to a lot of different things. One 0:16:49.400 --> 0:16:52.120 is he's portrayed his young and inexperience. There's actually memos 0:16:52.120 --> 0:16:53.600 in the campaign about how to deal with the youth 0:16:53.600 --> 0:16:56.600 and inexperienced issue, and so he's very sensitive to any 0:16:56.600 --> 0:16:59.080 sense that he's not up to the job. And he 0:16:59.160 --> 0:17:01.960 tells his advisors, if this thing falls apart's gonna be on me, right, 0:17:02.000 --> 0:17:04.000 And so he doesn't like that. Generically, he's also like 0:17:04.040 --> 0:17:08.399 fundamentally an institutionalist. He doesn't love the idea of dramatic change. 0:17:08.400 --> 0:17:11.240 He doesn't like taking those risks, and so he basically 0:17:11.280 --> 0:17:14.080 doesn't like what Stevenson and George Ball have to say. 0:17:14.359 --> 0:17:16.520 So he says, I want a new report. So he 0:17:16.560 --> 0:17:19.680 gets Alan Sprule, who's the outgoing I think he'd left 0:17:19.720 --> 0:17:21.560 a couple of years earlier president of the New York Fed, 0:17:21.640 --> 0:17:25.320 to write a different report. And that new report says, 0:17:25.640 --> 0:17:29.600 don't mess with it. It's probably fine, it's not a crisis. 0:17:29.920 --> 0:17:33.480 The public's impressions are wrong, but you need to address 0:17:33.520 --> 0:17:36.760 this forcefully, but you know, don't do anything drastic, and 0:17:36.800 --> 0:17:40.480 so he basically takes that to heart. Implicitly, the question 0:17:40.560 --> 0:17:41.760 is who's going to execute on this. 0:17:41.960 --> 0:17:44.320 And you think about this from the perspective of Kennedy, 0:17:44.400 --> 0:17:48.160 who's just been put into this very difficult job. And 0:17:48.640 --> 0:17:52.080 his advisors come to him and say, actually, we have 0:17:52.160 --> 0:17:55.480 an international monetary system with a basic flaw in it, 0:17:55.520 --> 0:17:58.120 which is the dollars pegged a gold at thirty five 0:17:58.200 --> 0:18:01.440 dollars announce and it's ultimately going to have to break 0:18:01.440 --> 0:18:04.520 that peg. This system doesn't work. We should do something else. 0:18:05.080 --> 0:18:07.800 You're like, is there some way to keep the thing going? 0:18:08.480 --> 0:18:11.919 And that's what leads the second report, and that's what 0:18:12.040 --> 0:18:14.600 leads to the growth of the euro dollar market, because 0:18:14.640 --> 0:18:16.600 it turns out that the way to keep the thing 0:18:16.640 --> 0:18:22.040 going is to develop this offshore dollar alternative. 0:18:22.400 --> 0:18:24.320 So now we can meet some actual characters in this story. 0:18:24.400 --> 0:18:26.840 So there's the Treasury team that comes in with Kennedy 0:18:26.920 --> 0:18:29.120 is head by at least with respect to this issue. 0:18:29.200 --> 0:18:32.400 Is two people in particular. One's Douglas Dylon of Dylan Reid. 0:18:32.560 --> 0:18:34.560 His father founded Dylan Reid. He's one of the wealthiest 0:18:34.600 --> 0:18:37.359 people in the United States, the former ambassador to France, 0:18:38.000 --> 0:18:39.680 and he was selected in part because he owned a 0:18:39.760 --> 0:18:43.200 vineyard Oprion actually, so a very well known vineyard in Bordeaux, 0:18:43.480 --> 0:18:46.919 so he had French roots sort of and does a 0:18:46.920 --> 0:18:48.800 good job. He's put at State. He's a contender for 0:18:48.840 --> 0:18:51.840 Secretary of State when Dulles leaves, he ultimately doesn't get 0:18:51.880 --> 0:18:54.040 the job, but Kennedy wants to put some own at 0:18:54.040 --> 0:18:58.240 Treasury who has a good business reputation, who is well respected, 0:18:58.320 --> 0:19:01.040 has government experience, and people generally like this guy. He's 0:19:01.080 --> 0:19:04.600 like seen as one of those consummate bureaucrats who's like 0:19:04.760 --> 0:19:07.800 sharp and thoughtful and a good listener and clear in 0:19:07.840 --> 0:19:10.400 all of these things, and so he brings with him Bob. 0:19:10.800 --> 0:19:13.320 Bob russis from the New York FED. He actually served 0:19:13.320 --> 0:19:15.880 in the Second Worl War under Charlie Kindelberger. Charlie Kinderburger 0:19:15.920 --> 0:19:17.879 is the father in some sense of the idea of 0:19:17.920 --> 0:19:19.840 the dollar as a key currency, or at least a 0:19:19.840 --> 0:19:22.040 big proponent of it. But they were doing strategic bombing 0:19:22.080 --> 0:19:25.480 targets together. Kinderberger was his commanding officer, so he had 0:19:25.520 --> 0:19:29.159 some connections to this idea through his wartime experience of 0:19:29.200 --> 0:19:32.280 a global dollar system. And their bias, both of them 0:19:32.320 --> 0:19:34.320 is to reinforce the existing system. They kind of want 0:19:34.320 --> 0:19:38.439 to find a way to save the Bretonwoods arrangement. So 0:19:38.520 --> 0:19:40.800 here's Bob russa looking back from a few years later. 0:19:41.560 --> 0:19:46.440 We got them to recognize after the big flurry at 0:19:46.480 --> 0:19:52.200 camera had October twentieth, nineteen sixty four, when the market went. 0:19:52.520 --> 0:19:54.679 Up to a forty dollars price. 0:19:56.040 --> 0:19:58.520 That time that was looked at it was quite a 0:19:58.600 --> 0:20:03.600 threat to the stability as a monetary gold price and 0:20:03.680 --> 0:20:09.440 got them alarmed. And so after that, when it was clear, 0:20:09.520 --> 0:20:13.760 particularly by the time President Kennedy came in and made 0:20:13.800 --> 0:20:16.199 it firm that we were going to continue to support 0:20:16.240 --> 0:20:20.960 thirty five dollars price, and then the London price began 0:20:21.359 --> 0:20:25.920 coming down, it was fairly easy to persuade these other 0:20:26.000 --> 0:20:29.040 countries that you know, we ought to be together in 0:20:29.080 --> 0:20:31.240 this because as gold comes back. 0:20:31.000 --> 0:20:31.679 Into the market. 0:20:31.720 --> 0:20:35.840 Now we the United States don't want to have to 0:20:36.800 --> 0:20:39.080 just have it appear that we're always taking all the 0:20:39.080 --> 0:20:39.920 gold out. 0:20:42.000 --> 0:20:43.520 Putting it in sometimes two. 0:20:43.320 --> 0:20:46.760 Of course, but why don't we share this as a 0:20:46.800 --> 0:20:51.000 buying pool when it comes into the market at thirty 0:20:51.040 --> 0:20:54.280 five Then we won't be in there bidding against each other. 0:20:55.240 --> 0:20:57.400 It will be an orderly arrangement, would be a little 0:20:57.400 --> 0:20:59.720 bit of like a cartel, but in the interests of 0:20:59.720 --> 0:21:01.200 the world monetary system. 0:21:02.000 --> 0:21:04.359 On the other side, you have Walter Heller. Walter Heller 0:21:04.440 --> 0:21:07.000 is the chair of the Council of Economic Advisors. Kenny's 0:21:07.040 --> 0:21:11.760 trying to balance out Dylan's like somewhat conservative eisenhowerd administration 0:21:12.680 --> 0:21:14.760 reputation with someone who's much more on the New Deal 0:21:14.800 --> 0:21:16.520 liberal side of things, and The New York Times calls 0:21:16.560 --> 0:21:19.360 him a prototype of the liberal economists. He's very well 0:21:19.400 --> 0:21:22.560 known for his tax policy views, and he often talks 0:21:22.560 --> 0:21:24.760 in terms of human flourishing, Right, we should adjust the 0:21:24.760 --> 0:21:27.600 tax god to promote human flourishing. And he brings with 0:21:27.680 --> 0:21:30.840 him Jim Tobin, who is a very well respected economist. 0:21:30.920 --> 0:21:32.879